Two weeks after the Hong Kong Financial Authority (HKMA) issued the second iteration of its inexperienced digital bonds, the Financial institution of East Asia and HSBC uncovered a brand new use case for the providing in repurchase (repo) transaction.
The brand new use case entails utilizing digital bonds as collateral for repo transactions between monetary establishments. Whereas cases of utilizing digital bonds as collateral are sparse, HSBC and the Financial institution of East Asia discovered relative success of their pioneering try at a repo settlement.
A repo permits one monetary establishment to promote securities to a different entity beneath a deal to reacquire the securities at a barely greater worth. Sometimes, the period of a repo is 48 hours and is used as a short-term borrowing technique by safety sellers.
As an energetic participant within the HKMA’s digital bond issuance, HSBC seems to be the short-term borrower, with each events assembly their wants for funding and liquidity.
In early February, the HKMA introduced the issuance of its second spherical of inexperienced digital bonds value almost $800 million. Working as a four-currency inexperienced bond, the providing depends on HSBC Orion’s blockchain answer with Hong Kong’s Central Moneymarkets Unit (CMU) deployed as a central securities depository (CSD).
For the reason that first digital bond issuance in early 2023, curiosity within the providing has reached excessive ranges, accentuated by wholesome secondary buying and selling metrics and the inflow of recent lessons of traders.
“The 4 digital bonds – lately issued by the Hong Kong authorities on HSBC Orion as a part of the CMU’s infrastructure – have seen unprecedented investor demand, secondary buying and selling, and now repo buying and selling,” stated HSBC World Head of Digital Asset Technique John O’Neill.
In its report, the HKMA identified a number of advantages of utilizing blockchain for bond issuances, citing effectivity and cost-saving advantages whereas pledging to advance interoperability between blockchains.
“It additionally confirmed the potential in DLT to reinforce effectivity, liquidity, and transparency in bond markets,” HKMA CEO Eddie Yue stated in September.
Digital bonds should not with out dangers
In the meantime, consultants have recognized a number of dangers related to digital bonds, together with
cyberattacks and a scarcity of public belief.
An Worldwide Capital Market Affiliation (ICMA) report highlights the challenges of low adoption ranges and “the grim prospects of a regulatory U-turn” in sure jurisdictions. Different dangers plaguing digital bonds embrace unintended forks of the blockchain and technological immutability related to blockchain.
“Blockchain expertise is topic to a quickly evolving regulatory panorama (together with tax therapy), which could have an effect on the safety, privateness, the power to purchase or promote bonds issued utilizing DLT or different regulatory features of DLT transactions,” learn a report from the ICMA.
